Where’s the Bite in McDonald’s Turnaround Plan?

McDonald’s (NYSE: MCD) can’t seem to get anything right these days. The fast food giant had a terrible year in 2014, marked by falling sales both in the United States and abroad. Here in the U.S., McDonald’s core customer demographic remains extremely stressed, and continues to pinch pennies. In the international markets, McDonald’s suffered from public relations nightmares in key regions like Japan and China, relating to food safety issues.
Unfortunately for shareholders, McDonald’s isn’t off to a good start to 2015. Sales and profits kept falling in the first quarter, because customer traffic declined again.
In response, new Chief Executive Officer Steve Easterbrook unveiled a major turnaround plan on May 4. While the initiatives are interesting and caused the stock to rise in the past several weeks, McDonald’s turnaround plans aren’t anything investors haven’t heard before.
Last quarter, McDonald’s global comparable sales, which measures sales at locations open at least one year, fell 2.3%. Comparable sales fell 2.6% in the U.S., 0.6% in Europe, and 8.3% in the Asia-Pacific, Middle East and Africa region.
Total revenue declined 11%, although much of this drop was due to unfavorable currency movements. Still, even excluding currency effects, total sales declined 1%.
McDonald’s earnings per share collapsed by 23% last quarter. As if that weren’t bad enough, McDonald’s also announced that it will close at least 900 of its restaurants around the globe. This decision is a reversal from McDonald’s aggressive worldwide restaurant opening strategy, which previously was one of the company’s key growth initiatives.
In response to such poor results, McDonald’s and its new CEO announced a significant turnaround plan at a big investor event on May 4.
The first major step, according to McDonald’s, is to restructure its operating segments. Going forward, McDonald’s will report under new market segments that include the United States, the International Lead Markets (which includes most of Europe and Australia), High Growth Markets (including emerging markets such as China, Russia, and South Korea), and Foundational Markets, which will house the remaining geographies.
McDonald’s believes this new structure will lead to a greater efficiency through streamlining its operations, and will result in less bureaucracy. That may be true, but it’s difficult to believe that simply changing around its reporting segments will really have much of an effect. This seems to be a measure that changes things only on paper.
The next agenda item was that McDonald’s announced it will accelerate its refranchising. Through 2018, McDonald’s expects to refranchise approximately 3,500 of its company-owned restaurants. This will push the percentage of franchised restaurants to 90%, from the current 81%.
This is an area in which management deserves credit. Refranchising is a highly lucrative arrangement for restaurants, because it results in a steadier stream of royalty fees, and also places most of the maintenance and renovation expenses onto the franchisee. This is the most promising of McDonald’s turnaround initiatives.
Aside from a higher rate of refranchising, McDonald’s other strategies aren’t anything shareholders haven’t heard before. McDonald’s stated it will return $8 billion-$9 billion in cash to investors this year, which is actually just in line with the company’s previously stated goal of returning $18 billion-$20 billion by the end of next year.
Separately, the company intends to cut general and administrative costs by $300 million per year. McDonald’s has repeatedly mentioned its plans to cut costs. Furthermore, cost cuts won’t do much to get traffic growing again, which is McDonald’s core problem.
The refranchising strategy is a smart one. Outside of that, these ideas have been heard before. It would have been better for McDonald’s to shed more light on what it plans to do to actually solve the problems that caused sales and profits to decline over the past two years.
Specifically, McDonald’s should have provided more information on its planned menu changes, as well as how it plans to speed up and improve customer service. These two issues are at the heart of McDonald’s poor performance, and until those core problems are solved, it’s unlikely McDonald’s will return to its glory days any time soon.
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